About Me

2015-07-01

Time to think urgently and creatively on the Greek issue

There is a need to balance the macro and micro economic
policies for the troubled countries and the potential moral hazard issues. The
argument for debt forgiveness, while may have some attractiveness, but if not
handled with great care, may create a moral hazard issue on the debtor's side.

The Greek tragedy, if it is to become one, reflects a
weakness of the single currency of the euro, at least the shortcomings in its design,
that is, the lack of consideration of a mechanism for a country or a number of
countries to exit from it when the circumstances have become so necessary that such
exit actions would be better than for that country or countries to stay inside
the euro zone.

That shortcoming in the design of the euro reflects the
erroneous approach of those involved in the euro process, that is to say, the
simple minded and linear approach to economic/currency integration.

That shortcoming may have also created a moral hazard
problem for some countries. In good times, some countries within the euro zone
may have spent too much beyond their means, caused by some imperfection in the
integration process that have over valued their economies. On the other hand, those
countries may experience economic problems so severe that it is difficult to
deal with within the single currency framework, because they lack the means to
adjust without the need to force severe cuts to their nominal income/wages, as compared
to the case where the country had its own currency and can devalue as a means
of adjustment to its reduced international competitiveness.

Given the current irreconcilable stance between the debtor,
that is Greece, and its major creditors, the so called Troika, there is an
urgent need for a rethink of the euro approach. The rethink needs to design an
exit strategy for a member country. An orderly exit of a member should be good
for both that member and the rest of the euro zone members. There is no point
to blame each other on the failure of the negotiations to claim a higher moral
ground, whether it is Greece or any other parties. What is needed is cool head,
creative thinking and quick actions. Failing to do that may cause unnecessarily
greater damages than it needs to be.